Biglaw, Citigroup, In-House Counsel, Money, Partner Issues, Partner Profits

Law Firm Profits Projected To Grow 5 Percent -- Don't Get Too Excited

Everyone's gushing about that positive profit projection and increasing demand, but the new Citi report delivers some bad news, too.

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Good news: According to the Citi Private Bank Law Firm Group (and its partner, the Hildebrandt Institute), firms are looking at nice, steady profit growth in the coming year. It’s not super, but who can be choosy in the current market? And partially driving this growth is an expected uptick in demand, so that’s good.

Bad news: While the media latched on to the favorable demand projection, the report expects firms to be more profitable because they are finally taking Citi’s advice on how to become more profitable — and that doesn’t bode well for rank-and-file attorneys.

Let’s see what’s in store for 2014….

As with prior reports from Citi, this one opens with a quote. Former UCLA Coach John Wooden said, “Failure is not fatal, but failure to change might be.” Easy for him to say — he didn’t lose for, like, 11 years. But this quote should fill the average lawyer with dread because whenever industry consultants say “change” they mean “taking away your job.”

And, indeed, that’s a prominent theme of this report. Buried beneath the “more people need lawyers” claim is this news:

To win greater efficiency, Citi sees more firms moving out of simply cost cutting and price discounting to more actively pricing and assembling a strategy for each legal matter before bidding on it. It also sees more professionalism and long-term thinking in the use of project managers, pricing professionals, leveraging temporary and contract lawyers, and more sophisticated use of knowledge management and technology.

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“Leveraging temporary and contract lawyers,” eh? Citi has seen the future and it’s Alex Rich. Perusing prior Citi reports, they’ve been preaching this sort of cost-cutting for a few years, and they finally feel like they’ve gotten through to these firm leaders. And indeed, Citi found cold, hard evidence that the firms are starting to figure this out. From 2002 to 2012, the proportion of temp attorneys in the leverage mix of firms has tripled, while associates declined from around 80 percent to around 65 percent. While no one wants to believe it will happen to them, it’s time to start facing the reality that temporary work isn’t just for TTT grads any more.

Reading between the lines of this report, it looks like the best advice for young lawyers might be securing some project management experience — you may still end up being a drone, but at least you can be a managing drone.

And despite the headlines touting increasing demand, the report actually backtracks on its own good news about demand:

Some of the systemic changes constraining demand growth for law firms are the fundamental changes in the composition and purchasing behavior of in-house departments (particularly acute for law firms whose client base is comprised largely of in-house law departments); the increasing emergence of alternative lower cost legal service providers (“alternative providers”), including the growing presence of accounting firms in areas of work traditionally handled by law firms; and the impact of technology on reducing the amount of time required to perform legal work.

I haven’t felt this jerked around since Homer bought that Krusty doll (the classic “that’s good/that’s bad” routine):

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We’ve discussed before how in-house counsel are increasingly walking away from Biglaw firms when it comes to even complex legal tasks. With technological advancements moving work in-house and alternative providers — including accounting firms — capable of taking on either whole or partial projects, Biglaw firms will need to look over their shoulders for a long time to come.

One suggestion from the report that is music to our (or at least my) ears is a reminder that managing a major business entity is a full-time job and law firm leaders should treat it as such by committing to managing their business instead of “good lawyers who we assume understand how to run a business”:

One development which gives us concern is that some of the newer breed of leaders continue to maintain busy, full time practices. In this scenario, their clients’ needs are likely to take priority, to the detriment of the management of the firm. If we could see any change, it would be that firms recognize that to be effective, the firm leader is best performed as a full time role.

In conclusion, the report strikes a positive note that seems at odds with everything it said beforehand:

We acknowledge that law firms have had to adjust to a new demand environment, but those adjustments are no different to adjustments other professional services businesses have had to make. Past recessions, where the doomsayers wanted to declare the end of the legal profession as we know it, were proven wrong. We think those doomsayers will be proven wrong again.

Well, law firms aren’t going to die, that’s for sure. But the phrase “as we know it” would seem to include a world where accounting firms and temp companies steal work, general counsel opt for keeping more work in-house, and the leverage mix disfavors full-time attorneys. I hate to burst Citi’s bubble, but it sounds a lot like a different landscape “than we knew it.”

2014 Client Advisory [Am Law]
Citi 2014 Client Advisory: Cautious Optimism [Hildebrandt Institute]

Earlier: Citi Report Reveals A Mixed Bag For Law Firms
General Counsel Increasingly Dumping The Top Biglaw Firms

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